The Bill & Melinda Gates Foundation Trust is not technically a hedge fund. It is a tax-exempt entity aiming to provide charitable donations worldwide. The trust aims to deliver positive returns to fund grants from the Foundation sustainably in the future.
To that end, the portfolio may be managed differently from most hedge funds. Rather than concentrating on growth and directional market bets, the Foundation may be concentrating on capital preservation and positive relative returns year after year.
Its largest holding certainly seems to suggest that is the investment approach its managers have adopted. The largest holding in the Foundation's portfolio is Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) with a near 44% portfolio weight.
The largest holdings
Michael Larson is the man charged with running the portfolio. He is the chief investment officer for The Gates Foundation.
Berkshire is the largest holding in the portfolio. The second largest is Waste Management Inc. (NYSE:WM). This is a pretty interesting holding. According to my research, the Foundation is the only large fund to hold a stake in this business. It's also one of the company's largest investors. The Foundation owns 4.4% of Waste Management's stock. The other top three holders are all index fund owners.
The question is, what do Gates and Larson see in Waste Management that the rest of the market seems to be missing?
The billionaire's association with the business goes back over a decade. Before the financial crisis, Gates' various investment firms owned around 2.3% of Waste Management. It also owned about 18% of Republic Services (NYSE:RSG), which was, at the time, the nation's third-largest waste services company by revenue.
In June 2008, Republic agreed to buy Allied Waste Industries Inc., Waste Management's close peer, for $6.24 billion in a so-called merger of equals. A month after, Waste Management offered to buy Republic. That deal fell through. Gates' foundation trust still owns around a third of Republic Services, though it appears this investment is held through the private investment firm Cascade Investment LLC.
Impressive business credentials
It isn't easy to find any analysis from Gates or Larson as to why they like these two businesses in particular. However, if I had to hazard a guess, I would say there are at least two reasons why the trust has so much cash tied up in these two enterprises.
First, there are high barriers to entry when it comes to waste management. It requires a tremendous amount of money to get into the business, and then there are regulatory hurdles to overcome. These regulatory hurdles and government scrutiny are enough to put off most competitors. These competitive advantages are what Warren Buffett (Trades, Portfolio) might call wide and deep moats.
The other reason is these companies' involvement in environmental initiatives. Waste Management and Republic are some of the country's largest recycling enterprises. This ties in with some of Gates' ecological initiatives.
It could just be the fact that both of these companies are tremendous businesses. Over the past five years, Waste Management has reported net profit growth of 15% per annum. It has grown through a combination of organic growth and acquisitions. It has registered an average return on capital employed of 12% over the past five years and a return on equity of around 29%.
Republic's figures are only a little less impressive. Normalized earnings per share have grown at a compound annual rate of 12% since 2015. The average operating margin over the past five years is 16%, and the average return on equity is around 11%.
Considering the fact that so many institutional investors seem to be avoiding these companies, it looks as if Gates has found some hidden gems.